Sally Beauty Holdings Inc (SBH) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings fiscal 2010 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. (Operator Instructions). And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Karen Fugate, Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, I would like to remind that you certain comments, including comments on matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934.

Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings' SEC filings, including its most recent annual report on Form 10-K for the fiscal year ended September 30th, 2009.

The Company does not undertake any obligation to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation of reconciliation of its adjusting items and non-GAAP financial measures in its earnings press release and on its website.

With me on the call today are Gary Winterhalter, President and Chief Executive Officer, and Mark Flaherty, Senior Vice President and Chief Financial Officer.

Now, I would like to turn the call over to Gary.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2010 first quarter earnings call. I will begin today's discussion with a high-level review of our results followed by an overview of our business initiatives. Mark will then take you through the fiscal 2010 first quarter results in more detail.

As you saw from our press release this morning, we had strong performance in our 2010 first quarter. We reported consolidated same-store growth of 3.8%, solid performance over last year's positive comps in Q1. Net sales were up 9.2% to $705 million, surpassing $700 million for the first time. Gross profit margin for the quarter was 47.3%, an expansion of 30 basis points, driven by strong performance in the Sally business.

Operating earnings ended the quarter at $70.6 million, up 6.5% over the prior year first quarter. Operating earnings as a percent of sales declined by 30 basis points to 10%. Higher share-based compensation and corporate expenses, as well as additional advertising costs in the Sally segment, impacted operating margin performance.

GAAP net earnings were $26.1 million, up 62.7% over last year, with earnings per share of $0.14. Adjusted net earnings grew 37.4% to $24.7 million, resulting in adjusted earnings per share of $0.13. Adjusted EBITDA for the 2010 first quarter was $87.4 million, an increase of 7.1% from our 2009 first quarter.

Quarter-end store count was 3,935, an increase of 166 stores or 4.4% over last year's first quarter. Organic store growth for fiscal 2010 is expected to be in the range of 4% to 5%. We ended the quarter with cash of $32 million and no outstanding borrowings on our ABL. In January, we made a mandatory repayment on our senior-term loan facilities in the amount of $22.3 million.

Turning to first quarter highlights for the segments, the Sally segment reported first quarter same-store sales growth of 3.7%. Net sales were $438.3 million, a year-over-year increase of 6.8%. Operating earnings improved by 8.9%, primarily due to growth in same-store sales and gross margin improvement in Sally's international business.

The Sally UK business has made significant progress since we rolled out our improvement initiatives this time last year. If you recall, the new leadership team launched assisted replenishment in all stores, optimized the merchandising strategy to better serve our retail and professional customers, and rationalized our store portfolio.

The UK team accomplished a great deal this past year and their efforts are being realized. In the first quarter, they grew same-store sales and revenue, while expanding gross profit margin. We are pleased with these results and expect the UK to continue to improve throughout the year.

On the marketing side for Sally US, we continued our customer acquisition campaign in support of our CRM Program. The return on investment for our advertising spend remains positive and we expect to continue increasing the number of stores participating in the program.

On December 16th, Sally Beauty added another international company to the portfolio through the acquisition of the Sinelco Group. Sinelco is based in Ronse, Belgium, and is a wholesale distributor of professional beauty products, primarily electricals, sundries, accessories and basic salon supplies.

Approximately 85% of Sinelco's revenue is generated from their exclusive label brands, which are manufactured in Asia. Sinelco does not own stores, but distributes product through a catalogue, e-commerce and sales offices located in Belgium, France and Italy. The company serves more than 1,500 customers in 35 countries.

With the addition of Sinelco, we believe we can extend our distribution reach into countries like Russia, where we do not have a physical presence. We expect to realize revenue synergies as we begin to introduce some of our existing products through this new distribution channel.

Now, turning to BSG, BSG performed well this quarter with same-store sales growth of 4.3% and strong net sales growth of 13.4%. Approximately 10% of the sales growth is attributed to the recent acquisitions of Schoeneman and Belleza.

Our sales consulting business and Armstrong McCall franchise division greatly improved operating performance in the quarter. We are optimistic we will see this improvement continue throughout the year.

Our Armstrong McCall business was recently awarded the rights to distribute Wella and Sebastian products through our franchise stores and sales consultants in Mexico. This will begin in early spring. The integration of Pennsylvania-based Schoeneman Beauty Supply is progressing very well. Schoeneman is a natural fit with our BSG business and the combined teams are working very well together to keep our synergy initiatives on track.

The BSG segment ended the first quarter with 997 stores, including 158 franchise locations for a year-over-year increase of 8% or 77 stores.

In conclusion, we had a strong first quarter and a good start to the new fiscal year. We believe we will have another year of strong performance, generating revenue growth, gross margin expansion, and strong cash flow.

Now Mark will provide more financial detail for the first quarter. Mark?

Thanks, Gary. Consolidated net sales for the 2010 first quarter were $705 million, a 9.2% increase. This increase is driven by same-store sales growth of 3.8%, the addition of new stores and a positive impact from foreign currency exchange of 1.3% of sales. Consolidated gross profit was $333 million, or 47.3% of sales, a 30-basis point improvement from the fiscal 2009 first quarter.

First quarter SG&A expenses, including unallocated corporate costs and share-based compensation, were $250.8 million or 35.6% of sales, a 70-basis point increase from the 34.9% in the year-ago quarter. This year-over-year increase is partially due to additional rent and occupancy related expenses associated from the opening of new stores and acquisitions and higher advertising cost in the Sally business.

Unallocated corporate expenses, including share-based compensation, were up $6.9 million to $26.2 million. This increase is partially due to higher share-based compensation, a negative year-over-year comparison from foreign currency translation adjustments, and cost reduction deferrals that we took in the first quarter of last year.

If you recall, these actions included deferred merit increases, variable expense reductions related to benefits and payroll related costs, and a hiring freeze. We began to implement these programs back as our business continued to perform during the economic crisis. This expense increase was expected and included in our full-year expense guidance we provided on the fourth quarter earnings call.

As a reminder, our guidance for the fiscal 2010 year for unallocated corporate expenses, including $10 million in share-based compensation, is in the range of $85 million to $90 million in fiscal 2010.

Consolidated operating earnings in the first quarter increased 6.5% to reach $70.6 million. Operating margin was down 30 basis point to 10%. The first quarter performance was impacted by higher SG&A and advertising expenses.

Interest expense net of interest income for the first quarter was $28.5 million and included $2.4 million of non-cash income related to our interest rate swap transactions.

Interest expense declined $11.2 million over the last year's quarter primarily due to lower rates on our loan facility. As a reminder, our interest rate swap agreements with the notional amount of $350 million did not qualify for hedge accounting treatment and expired on November 24th.

Our adjusted net earnings were $24.7 million, a 37.4% increase from the year-ago quarter. Adjusted earnings per share was $0.13 after adjusting for non-cash interest income of $1.4 million, net of tax, from the mark-to-market changes in the fair value of our interest rate swaps.

On a GAAP basis, net earnings for the fiscal 2010 first quarter was $26.1 million, an increase of 62.7% with diluted earnings per share of $0.14.

Adjusted EBITDA for the first quarter was $87.4 million, a 7.1% increase compared to $81.6 million in the prior-year quarter. This increase is primarily due to higher gross margin in segment operating earnings.

And turning to the business segment, starting with Sally Beauty, same-store sales for Sally Beauty grew 3.7%. Net sales reached $438.3 million, a growth of 6.8%. Sales growth was driven by same-store sales, new store openings and favorable foreign currency rates.

Gross profit for the quarter increased $17.3 million or 8.1% over the year-ago quarter with a gross margin of 52.5%, a 60-basis point improvement.

Improved performance in the UK business, as well as favorable customer and product mix, contributed to the margin expansion. The Sally segment reported first quarter operating earnings of $71.1 million. Operating margins were 16.2% of sales, up 30 basis point from 15.9% in the fiscal 2009 first quarter.

Turning to the BSG business, during the first quarter, our BSG segment grew same-store sales by 4.3%. Net sales were $266.5 million, a growth of 13.4% over the prior-year quarter. Sales growth is primarily attributed to recent acquisitions, new store openings and growth in same-store sales.

Gross profit for BSG in the first quarter increased 13.6% to $103 million with gross margin of 38.6%, which is comparable to the prior-year's quarter. Segment operating earnings for BSG in the first quarter increased 26.5% year-over-year to $25.6 million. Operating margin at BSG improved 100 basis points to reach 9.6%. This operating margin improvement is the result of cost reduction initiatives and savings from the warehouse optimization initiative.

And looking at our balance sheet for fiscal 2010, cash and cash equivalent at December 31st, 2009, were $31.8 million. Inventories increased $19.5 million from September 30th, 2009, and include $10 million of inventories from the Sinelco acquisition. Inventories increased $7.6 million, or 1.3%, from December 31st, 2008.

Capital expenditures for the first quarter were $12.1 million. For the fiscal year 2010, we expect capital expenditures to be in the range of $45 million to $50 million.

We ended the quarter with a zero outstanding balance on our ABL facility and approximately $325 million in borrowing capacity. Our debt at the end of the quarter, excluding capital leases, totaled approximately $1.7 billion. We are very comfortable with our existing debt structure and are in an enviable position of not needing to do anything with our debt at this time. However, we will continue to be -- proactively consider our refinancing options and the conditions of the debt market.

There is nothing more specific that I can tell you at this point, but we will let you know more about our thoughts in the months ahead.

Now I'll turn it back over to Gary.

Thanks, Mark. In summary, we had another strong quarter, providing a good start to the new fiscal year. We posted 3.8% growth in same-store sales, expanded gross margin by 30 basis point and grew GAAP net earnings over 62%. We believe we are well positioned to execute on our strategy for long-term growth and remain confident we will deliver another year of solid performance in fiscal 2010.

We will now turn it over to the operator to take your questions.

Thank you. (Operator Instructions). Our first question will be from the line of Grant Jordan from Wells Fargo Securities. Please go ahead.

Good morning. Thanks for taking the questions. My first question, you talked about 2010 looking to improve financial performance. As you think about it, do you think that'll come from more of an improvement on the gross margin side or leveraging your SG&A costs?

Grant, this is Gary. Good morning. I think it'll come from both. As we've said over and over for the last three years, our gross margin increases somewhere between 30 and 50 basis points a year, just due to the customer and product mix changes that we see year-to-year. On the BSG side, we are still getting synergies from our warehouse optimization program, as well as the Schoeneman acquisition. We will be realizing some nice synergies throughout the rest of this fiscal year.

And also in our European businesses, as I've mentioned, gosh, probably a year ago, we made some investments in infrastructure in Belgium, so that we could service our businesses in Belgium, Germany, France and Spain. A lot of that is just kicking off, so we expect to get some expense synergies at the SG&A line there.

Okay, great. And then I appreciate the comments about the capital structure and just looking to be proactive where it makes sense. Do you -- clearly, still acquisition opportunities, but do you think there's a potential for the Company to look to pay down debt as part of some of your analysis as it relates to the capital structure?

Well, absolutely. Again, as we've stated, I think, on every call since we spun out of Alberto-Culver, our long-term strategy is to invest in growth of the business, both organically and through acquisitions that make good, strategic sense for us, and to also pay down debt.

Now, when we look at that, truthfully, there are not a lot of large acquisitions out there. Schoeneman was on the large side for us, so we've stated in the past, and I think you can count on it going forward, that we -- in normal years, we won't be able to spend all of our cash flow making acquisitions and we fully expect to pay down debt or do things with our capital structure that are favorable to the long-term interest of our shareholders.

Great, thank you. That's very helpful.

Thank you. And our next question comes from the line of Emily Shanks from Barclays Capital. Please go ahead.

Good morning. This is actually Matt [Lesian] for Emily. Thanks for the call. Just a couple of question this morning for you guys -- I know in terms of kind of a follow-up question, the capital structure comments that Grant was asking about, I know you guys mentioned that you wouldn't give any more color specifically around what portion of the capital structure you'd be proactive with. Would you -- it would be fair to comment that that's more of the credit facility that you guys are looking at and not your senior and your sub-notes?

Yes, actually, we're looking at -- for the most part, we're looking at basically our term debt and our ABL facility, first and foremost, because of the maturity dates. However, it's just that we look at our entire capital structure in its entirety, so if there were compelling opportunities in the high-yield market, certainly we'd look at that as well, but we're really focused on the maturities of our ABL which is coming up in two years, as well as in 2013 and 2014, our term debt. So that's really our areas of focus at this point.

Great. And then it would be fair to say in terms of timing for when you looked at it, you're just going to basically see when the debt markets are going to be compelling for you to refire, extend that out, correct? Is that kind of your comments or do you have a timing in mind?

Really, right now, it's primarily is that our timing is opportunistic. If we can get to a point where we see something that's very compelling and makes sense for us, it could be sooner than later.

Great. Secondly, in terms of -- what did you guys see as your strongest selling categories for the quarter, any specific trends that you can comment on?

We don't give a lot of detail, Matt, on our categories, but I will tell you that we -- our electrical category, which normally is a good category for us in Q1, did well, and our hair color category continues to outperform our overall business.

Great. And then just lastly, in terms of -- you guys mention almost in every press release, that you receive positive impacts from your gross margins due to the product and customer mix shifts. What specifically -- what specific products are you benefiting from? Like can you give us just a little bit more color in terms of that direct benefit? What exactly is that shift coming from?

Sure. The three reasons that we have stated over and over for our increase in margin are the customer mix, and that's simply -- as we become -- as our retail business grows faster than our professional business in the Sally Division, the retail business is at a higher margin. And we continue to increase the retail business faster, simply because the professional business, although it continues to grow, is a finite business. The retail is where the real opportunity is for us.

As far as the product mix, our control label brands, which are the brands that we own, continue to grow faster than our overall business, and those obviously, are at better margins. And the low country cost sourcing initiative that we put into place about two and a half or three years ago, where we are bringing a lot of our electrical appliances and brushes and sundries directly from Asia under our own brand names is paying off very nicely.

Great. That's all for me. Thanks, guys.

Thank you.

Thank you. Our next question will come from the line of Joe Altobello from Oppenheimer & Co.. Please go ahead.

Thanks, good morning, guys.

Hey, Joe.

I just wanted to follow up on that last question regarding margin and something you said earlier, Gary, about each year, you tend to see, just from mix shifts, a 30- to 50-basis point improvement in gross margin. You were sort of at the low end of that range in the quarter. I was a bit surprised, given the pretty strong comps, you didn't get a little more leverage on the gross margins. I was wondering if you could help us out there a little bit?

Yes. First of all, on the Sally side, which is a big driver of the gross margin, as we mentioned, we did beef up some advertising there, as I mentioned in my prepared remarks. We're getting a great return on this customer acquisition program that we've been doing, so we continue to add stores to that. And as long as we continue to see very nice customer count increases and a nice return on that program and our Beauty Club Card Program, we're going to continue to invest there.

Now, having said that, I believe that the first quarter was a bit of an anomaly. Last year, we and most other people, even though our comps stayed positive last year in this quarter, we were a bit concerned going into this quarter this year and wanted to make sure that we had a good quarter. So we did a little more than we would normally do.

And another reason for not leveraging that as much was, Joe, was BSG's gross margin was flat for last year. Now, that has a bit to do with Armstrong McCall, which is a lower gross margin business, actually doing better, but as you see, BSG was still able to leverage that gross margin into a significant improvement in operating margins.

So going forward, we kind of said at the fourth quarter call, to expect our shared services, which is a little different question than you're asking, to be in the range of $85 million to $90 million. And it appears as though that all took place in Q1, and to a large degree, it did. So even though our shared service expenses in Q1 were $26 million, obviously, if you took that every quarter, we'd be close to $105 million and we're still telling you that we believe we'll be between $85 million and $90 million.

Got it. So some of the Sally advertising was above the SG&A line, it sounds like?

Yes.

Okay. Got it. And then secondly, in terms of salon traffic, I mean, obviously, that's taken a hit, given the downturn in the economy. Are you seeing a bit of an improvement in salon traffic?

I think that salon traffic is improving a little, but we really can gauge that more from input from people like Regis. It's very difficult for us dealing with smaller salons who aren't sophisticated enough to really measure that to give you any good information there, but I think following Regis' comments, and just the general sense that we get from beauty shows and from our sales consultants, that salon service business, in particular, is starting to pick up a little bit.

Okay, great. And then, I'm sorry, just last one. Control label, you mentioned, Gary, as a driver of gross margin expansion. I imagine that had a pretty good 2009. I was curious if you saw an acceleration or deceleration in your control label growth in the first quarter?

Well, Joe, what we've said for a long time now is that piece of the business typically grows about 1 percentage point as a percent to total every year, and I believe we ended last year, fiscal 2009, right around -- a little less than 42, I believe it was. That was up about a point from the previous year and I expect the same thing to happen this year.

Okay. So pretty consistent?

Yes.

Perfect, thank you.

You're welcome, Joe.

Thank you. Our next question comes from the line of Karru Martinson from Deutsche Bank. Please go ahead.

Good morning, guys.

Good morning, Karru.

In terms of the 4% to 5% store growth, are you seeing a meaningful benefit from rent concessions, opportunities out there, given the real estate picture?

We are seeing some of that. I'll tell you where we made some significant headway over the last 12 months is reaching out and trying to renew some of our leases that aren't necessarily due this year, but may be coming due for renewal in the next two years. We've reached out and early renewed some of those at some very favorable rents, and obviously, we are finding space a little easier to come by, but it's a bit of two-edged sword there, Karru. It's kind of like the housing market. If you have prime real estate and you're in a good location, you really haven't been hammered as much by the real estate fallout as those that don't.

And it's the same thing in commercial shopping centers. When you're looking at a shopping center that's well anchored in an area that's growing and doesn't have a lot of vacancies, you're not going to get an exceptionally good deal right now. However, if you want to go into a shopping center that's just lost a major tenant or two, you can. So you have to make that decision though, which do you want? Sally depends significantly on retail traffic coming into good shopping centers to grow its retail business.

Now, on the BSG side, where you're dealing with much smaller landlords typically, there is probably more room to get some favorable rents there and we have been experiencing that, particularly in California, which has been nice, because the rents there, over the last several years, have been pretty steep.

Okay. And in terms of that CapEx spend, is that just store growth or is there anything else that's tucked in there?

As far as for the quarter or for the year?

For the year, for the guidance.

No, the CapEx spend breaks down very similar to what you've seen in the prior year is -- roughly about anywhere from two-thirds to 70% of that -- of every dollar spent on CapEx goes to stores and then roughly 15% to 20% is IT and the rest is distribution facilities. And you may see a little flip-flop between IT and distribution because of the warehouse optimization program in the prior year and our efforts towards shoring up some projects on the IT side this year.

Okay. And my apologies if I just missed this in the news flow, but did you guys settle the -- or is the Matrix case with L'Oreal settled now or is that still going on?

No, it's still going on.

Still going on, okay. I thought I hadn't seen anything. Is there any update that can be provided?

No. It's just still going on.

All right. Best of luck, guys.

Thank you.

Thank you. Our next question will come from the line of Linda Bolton-Weiser from Caris & Company. Please go ahead.

Hi, how are you?

Good, Linda, how are you doing?

Good. Can you just comment on just kind of a general industry thing? You know, with Procter & Gamble bringing that Frederic Fekkai to the mass market, it just seems like a general trend of more kind of professional salon brands being sold at mass retail.

Do you think that that is going to hurt the part of the BSG business that is products sold to salons for resale in the salons? And can you also remind us like what percentage the consumable shampoo and conditioner sales are for BSG, and then what percentage of that would be products resold?

Yes. First of all, Fekkai was never a salon brand, so we never distributed it, nor did any other distributor, to salons. So that has nothing to do with a salon brand going retail. I actually don't see that accelerating in the future.

The next question was regarding BSG's retail business. There are categories that are generally resold to the salon which are shampoos, conditioners, styling agent hairspray, represent a little over 30% of BSG's business. However, about half of that is sold to the salons for resale; the other half is sold to the salons either for use and consumption in the salon or personal use.

Great, thanks. That's very helpful.

You're welcome, Linda.

Thank you. Our next question will come from the line of Erika Maschmeyer from Robert W. Baird & Company, Inc.. Please go ahead.

Hi. Could you please give some additional color on the traffic and ticket for Sally?

Yes, both up.

All right. That's good (multiple speakers)

Traffic was up nicely, has been for, gosh, I think consistently for at least the last 10 quarters now, and I attribute that to the Beauty Club Card Program and the Customer Acquisition Program that we've been working diligently on. And the average spend continues to increase, even though some of our heavier categories have not grown as fast as they have in the past.

And what I mean by heavier are the higher price points. So I look at that as a very good sign and of course, as our retail business grows faster than our professional business, and the retail ring is a smaller ring, but a more profitable ring, I think that speaks very well to our average ticket continuing to increase even in the light of that.

Great. So what do you say to this quarter, the bulk of the increase, or it was a little bit more attributable to traffic than ticket?

Oh, gosh, yes, I would say it was a little more attributable to traffic than ticket, and then that's pretty consistent across all of our businesses.

Great. And then did you recognize synergies from Schoeneman in Q1?

Gosh, if we did, it wasn't much yet.

No.

No, the majority of that, Erika, will -- it'll start here in Q2 and we'll see the bulk of that in Q3 and Q4.

Okay. And then can you quantify that at all, the synergies from the infrastructure investment in Belgium?

Can we quantify that?

We haven't really broken that out specifically by geographic country because in a way, that leverages off of a lot of different platforms, so it would be a little difficult to quantify it down that granularly.

What about in terms of an overall EPS impact?

Well, first of all, it happened last year. The infrastructure improvements that we made and some of the management -- when we made these infrastructure changes, we had to bring in some better financial people, some tax people, some HR people. I'm sorry, are we talking about Sinelco or the infrastructure that we did in Belgium last year?

I was asking about the infrastructure investment in Belgium, but Sinelco is (multiple speakers)

That's what I thought.

Yes.

But anyway, most of that is behind us. What we're doing now is accelerating our growth over there with organic store openings and looking for small acquisitions to add to that business to leverage the infrastructure that we've built over there last year, but when we talk about building infrastructure, this is -- we're talking about moving into a larger and better distribution center which we did over a year ago, and as I mentioned, adding some people to our infrastructure to better handle a larger business over there. So we're not talking about a lot of capital expenditures to begin with, but we look forward to leveraging what we've already done. Now going forward, that was the plan all along in making that acquisition.

Okay. That makes sense. And then could you give an amount in terms of the incremental savings that you've realized from the warehouse optimization in Q1 at BSG?

About $1.4 million.

Okay. So you've got about $0.8 million left to go?

Based on our guidance, that's correct.

Okay. And then near term, do you see more near-term opportunity in Western Europe or in South America?

Well, in near term, Western Europe. We're very new in South America. As you know, we just made that acquisition in Chile back in August and we're really going to take a little bit of time to understand that market and to get comfortable with the rest of Chile as far as expanding. We're only in Santiago now and also to learn the neighboring countries as well before we really start ramping that up.

Great. Thanks so much.

You're welcome.

Thank you. And our next question comes from the line of Jill Caruthers from Johnson Rice & Company. Please go ahead.

Good morning. If you could talk a little bit more about the increase on the corporate expense line. I know you addressed it a few times, but if you could dig into the $5.5 million increase, kind of how that was divided between the categories?

It was actually about $6.9 million. In the categories, it breaks down as about half of it is between share-based compensation and the unfavorable impact of translation adjustments, the inter-company settlements from the divisions to the corporate side, as well as the remaining piece of that is really kind of payroll-driven, not only from the merit increases, but also the increase in headcount to support some of the other growth patterns that we've had, as well as to support some of the IT initiatives that we have going on for this year.

Also in there, there's some professional fees, and as well, this is what you'll see in the 10-Q is the Sinelco acquisition. The transaction costs are under the new accounting rules. So they're treated as a period expense, so there's about $400,000 worth of transaction costs running through there too.

Okay. Thank you. If you could talk about the BSG side saw a really good comp growth in the quarter, and that's acceleration from what we've see over the past few quarters, if you could talk about kind of what's driving that comp?

Well, a couple of things -- we believe we're taking market share significantly in the eastern and western part of BSG. Also, as we mentioned, our Armstrong McCall business, which really doesn't factor into our same-store sales, is doing very well.

We also are just now annniverarying some brand changes. If you recall, about a little over a year ago, we parted ways again with Farouk for the second or third time and we've anniversaried that now, as well as some other minor distribution changes. So those all -- all those reasons played into a very good comp quarter for BSG stores.

Okay. So it seems like some of that comp momentum could continue throughout the year, correct?

Yes, I would believe it would and as I've mentioned many times in the past, also the BSG business, as the industry continues to become more and more booth-renter, that's a store customer. So as we've seen for several years now, the store business at BSG generally outperforms the sales consultant business, although in this particular quarter, the sales consultant business did quite well also.

Okay. And then just last question, kind of on the Sally Beauty, the [DRM] Program, some of the new customers you gained in the back half of the last fiscal year, if you have any data on that as to how well you've been able to retain those new customers. Are you seeing them shop the store more, or do they really need to have that circular in their hand to get them in the store?

Well, the big win for us is when we have a customer come into our Customer Acquisition Program that then gets into the Beauty Club Card Program, and we're seeing some great results there because I believe we're targeting the right person. And once we get them in the Beauty Club Card Program, then we have a fairly constant contact with them which is working out very well for us.

Thank you.

You're welcome.

We have a follow-up from the line of Joe Altobello from Oppenheimer. Please go ahead.

Thanks, just two quick [calls]. First, in terms of the Sally advertising, I think, Gary, you mentioned that this quarter was sort of an anomaly. I take that to mean that you don't expect to see the same level of advertising for the rest of this year that you saw in the first quarter.

That's correct; that's correct.

Okay. And then secondly, how should we model the swap contracts going forward? What are you anticipating for the second quarter?

It's expired, Joe.

So it's all done?

It's done.

Perfect, okay. Thank you.

Thank you. And with that, speakers, I'd like to turn it back over to you for any closing comments.

Okay. Thank you, Operator. Well, as I mentioned, we're pleased with our strong results in the first quarter and expect a prosperous year. We intend to stay on course with our long-term objectives to invest in Company growth via acquisitions and organic store openings, while reducing our long-term debt.

As always, thank you, all, for your interest in our Company, and I look forward to seeing you soon.

Thank you. And ladies and gentlemen, today's conference call will be available for replay by dialing in at 800-475-6701 and entering the access code of 144420. International participants may dial 320-365-3844 and once again, the access code is 144420.

That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.